>> that is right, though. >> you need a huge new revenue source. i come from new hampshire, and we have had an experience of this in new england. new hampshire has no income tax, no sales tax. every state around hampshire had one or the other. in the 1960's, and every state added another one, either the sales tax or the income tax. within hesitation of their people that the other tax would come out and the revenue would be used because it will be more effective in collecting it.

every one of those states, the revenues have gone down, the income tax has gone up, and the size of government has gone up. from my standpoint, a value- added tax is just a way to grossly expand the size of the government, and it does not fix our revenue problems. more importantly than that, just the point where i think this argument ends up, the american people would annihilate any party that passed a national sales tax rate. if the democratic party thinks they are in charge now, and they are, and the republican party has done some things to marginalize itself, but if you want to resurrect a republican party, give me a value-added tax. >> let's take the value-added tax off the table for this the session, and i want to turn to donald marron and bring it back to the reality we are today and get your numbers perspective. speaker boehner offered up to the president $800 billion in revenue, all through closing loopholes dealing with deductions, no increase in rates. first of all, on the basic

math, can you get to $800 billion over 10 years that way? how would you do it? and more importantly, as i worked my sources on capitol hill, looking what the president has offered, $1.6 trillion, could you get to $1.2 trillion by eliminating deductions, perhaps installing caps there without raising rates? >> i will play the think- tanker-inside-washington card, and go back to what is not possibly achievable and then come back to that. if you think about from an economic perspective, the hierarchy of the best ways to raise more revenue, the first senator mentioned baker, but people earlier mentioned this is undoubtedly the best way to raise additional revenue if you can find a way to do that. we talk about growth inside the fiscal discussion. we should not lose track of the fact that there are other things we can do as a nation to encourage growth, and an obvious one is to think about

intelligent immigration reform. that has significant fiscal impact that is outside the box of these discussions and should be brought back in. the second is, and this is the other thing outside the box, the next best way to raise revenue is to tax things you do not like. to the extent we're worried about climate change and carbon emissions, doing something like a carbon tax is an attractive place to look for revenue. next most attractive is consumption tax, value-added tax, or some ingenious ways to turn the income tax into a consumption tax. that is probably the best way to raise large amounts of revenue. then you come to fixing the income tax. in fixing the income tax, while you broaden the base you cannot lower the rates, you want to go after the tax preferences. we can call them all loopholes. keep in mind most of them are

fundamental social and economic policies. they are the right place to look. as a budget matter, these ideas of broad-based caps on and makes sense from an arithmetic point of view, that if you are aggressive, you can raise the numbers you are describing. as larry was pointing out, if you decide to limit it only to the people who are $250,000 and up, you lose a significant amounts of money. the first reason is it turns out there's a lot of money in potential taxes and people who earn between $75,000 and $250,000, the middle class, and if you were willing to have these -- and another would be if you put a cap at $250,000, you have to face it again. on a blackboard you can get to the kinds of numbers that boehner has mentioned, although i have not seen what specifics

are behind it. to the extent to put constraints on that, you've trended that number down. -- you start trimming that number down. >> i want to expand this out. >> i want to start by taking a step back in terms of what we are trying to do in fixing the budget. it is an opportunity to reform our budget as put in place a deal that would stabilize the debt. there are a lot of things that are wrong with our budget. when you think about spending, you do not want to renew spending. you want to think about how to shift our spending from consumption to investment, about how to change entitlement so they are for the long term, not squeezing out the rest of the budget and strengthening them for the most vulnerable. on the tax side, no question you want to reform the system. there is nobody who should want to be in the business of

defending our current tax code. to start with the most daunting, we have over $1 trillion a year in lost revenue because of all the breaks that run through the code. generally, they are regressive, inefficient, ineffective, they have virtually no oversight, they run on automatic pilot. when you pay your taxes, you think i'm getting money back, i got some tax breaks, so they are incredibly popular. if you listen to experts, there are few people who want to defend them. i agree with bill and donald in talking about the different ways you can reform the tax code on the income tax. the single best thing we would do is go through and look at the trillion-plus in tax expenditures. think about how we want to change that. do you want to subsidize vacation homes? do we need to subsidize the home mortgage up to a million dollars?

the health care decision is not only tax reform, it is health care reform. we would want to tackle all of those things. many of us think the political system is not well equipped to take on these hard battles. then you come to some of the second-best options, a way to limit these tax deductions to caps? a lot of the ways you can relate this so you can limit the deductions to the expenditures, and you can meet targets. you can meet a purchase of the -- a progressivity target, revenue targets, by changing a couple things. what kinds of things would be capped, and a tax expenditure cap -- what would you do if you had progressive rates, or face attack at the upper incomes, and a way to offset the costs. if people were getting hit, you can compensate for that in other ways in the code.

my main point would be we do not want to walk away from the opportunity to reform the tax code. it is swiss cheese, the thing that everybody hates. think it is hard to fix these problems. one of the reasons people talk about lowering the rates and a broadening the base is that is what how you helps the incentives. we do so much money that you can reduce the deficit significantly, lower the rate, still have the group you are asking to pay more, pay more if you're willing to broaden the base. the point i would make is that as difficult as it is, we should use this opportunity to think about what a most sensible tax system is, and one of the pieces we have made progress on, which will have real revenues as a budget deal, and that along with spending and economists is critically important. no matter how we raise or how much we raise the revenues, a small or big enough, we should strive to raise that in the most efficient way possible, and that is including tax reform as part of this overall deal is a

critical part of growth. and shouldn't be lost in the mix. >> david, do you want to get in? >> i want to echo a number of the comments, because the way i describe it is if we had actually been trying to develop an incomprehensible, confusing, and globally uncompetitive system which could not have done -- system we could not have done a better job than what we got. there is a something to the principle called entropy that says all organized systems evolve to chaos, and where i looked when we started with tax reform, that is pretty much where we have gotten into at this point. i recognize again that i would say that there is a short-term and long-term problem, and we should find a way to be addressing both of those. on the short term, we need more revenue, and we need something

getting back to this market- credible $4 trillion deal, you need something the markets can look at where they can see -- taxes, it is there and it will show up so i believe that $4 trillion is credible. in the long term we should be taking the opportunity to address our total system. the world has changed significantly from where we were 20 years ago. 20 years ago there were only 1 billion active participants in the global economy. it was really just the u.s., western europe, and japan. today there are 4 billion people participating in the economy. we have got the same antiquated tax system today that we had 20 years ago. we should be taking the opportunity there to look this thing and say, what does it take to be globally competitive today? yes, i was on the commission,

and some might think i like that proposal a lot, which i did. it does not have to be exactly like that, but there are some principles that are a part. -- that are important in there. the whole idea of during individual corporate cap gains, do it all at the same time make sense. the territorial system for companies makes sense, with clauses so that nothing -- nothing screwy happens. then we relook at all these deductions, and we should be looking at do we want all these at a time when our economy needs more flexibility to respond to a very globally different place than we had 20 years ago. it is -- to pass up this -- i think it a shame to pass up

this opportunity to actually fix and get the base rates off of a system that has just evolved to chaos. i was heartened by listening to senator packwood, because they're too many people in washington explaining that this is a two-year process. hearing that it can be handled quickly when you get some rational people in a room i found quite encouraging. >> could i jump in? i would champion everything dave said. but what is never discussed in enough detail is how much this is costing us as an economy by not acting. the paralysis is unbelievable. when they talk about uncertainty and the inability to make investment decisions, to say nothing of attracted new capital to the united states -- i have 70 offices in 26 countries -- you are competing with an antiquated system. i come from the world that says you can have it all, get

anything you want, take all the exemptions, expenditures, because that will all be taken away. there is no way this is costing me as much as doing nothing. i am on the camp of all that they've said, there is an urgency that speaks. it is all due haste. >> let's talk about that. let me paint a picture for you. you have the opportunity to bring the president and boehner to the irish times to solve this tax issue, to split the difference where they are now. can you tell me what might play on the republican side and the president's side, fellow democrats in congress? what could pass if you have that opportunity? >> it would be a three-pitcher event. i hear bob packwood about the history of putting his bill together 30 years ago.

i am impressed by a kinder and gentler time it was, to have the kind of easy communication of lloyd bentsen about a little problem that he has to have resolved. it is a different era. it was revenue neutral was a great advantage to you in that effort, and even though you can quickly get to it, it was a two-year process. of educating not only the public but the members involved. i would argue that the interest groups embedded in tax expenditures are even stronger today. it is not just about the guys who want to go sailing or play golf. they have tv ads running, grass-roots operations out there. >> but there is one thing else. in 1986, there were no cellphones. they had to find a wired telephone to call, and by the time they had done that, it was already passed. >> this is very hard to do. as bill outlined earlier, you

can see where the groups are lining up. the easiest thing they can bring about is gridlock and doing nothing. i am a firm believer if we go back to the committee system we can actually do more in having these kinds of general discussions, because as will marshall said, it will take a blend of policies, some rate changes, some base broadening, but let's see what the traffic will bear, but the political environment, the culture on the hill will accommodate. >> dave camp and sander levin cut a deal? >> begin the process and try to confer. if there is a new revenue source, carbon tax, some sort of consumption tax, it will emerge out of their common frustration that they cannot get where they need to go. what we need to do is do not

micromanage, don't be prescriptive. give them a number, a ratio of expenditure reductions to tax reform, revenue enhancements, and if that task falls to the -- and give them that task this fall to the committee and over the next six or nine months, task them to meet those numbers. i think the capability is there to do it. it may not be rostenkowski and packwood, but if there is a will, they will get the job done. >> i do not think it is credible to kick the can down the road that far at this point. i think the reaction in the real economy would be devastating. you have to imagine what you are suggesting, vic, which is a good suggestion in the context

of doing something now and whether that something is betting at the rates snap back, as i would support, and taking some effort to restrain mandatory spending in order to offset the sequester -- that has to happen now or we are in the soup if we let this slide for six months. >> would you be open to the suggested that the rights revert -- the rates revert back, but then open the door may be rates come back down? >> democrats have the easy side of the position, which is that everyone agrees that taxes should not go up on 98% of americans. that is the easy side of the position, but then they have to be open to what a tax reform discussion along the lines that vic suggests, give you the opportunity to do in the course of a congressional process that could produce lower rates. >> michael peterson, i want to

get you involved. financial markets, you know these things, they are waiting for something up front as well as of the long term. you cannot just kick the can down the road, right? >> absolutely. what i have been struck in the debate is the time, energy, and attention that has been spent on these tax policies, and the neglect of the broader challenges we face. this is the fantasy of bill and donald that the entire world is focused on capping deductions and what the ramifications are and this is how they spend their lives, so they are in their element, but -- of the broader goals here. -- but we sometimes lose sight of the broader goals here. as maya was saying, the first question i wanted to answer, does this stall the problem? we have a medium-term problem which is the 10-year window, we're going to borrow $10

trillion unless we change our policies. then we have what we feel is a primary threat to the future, the long-term problem. before we get to the detail of what the percentage should be, we need to make sure that whatever we negotiate solves those problems. it is essential that revenue be part of the equation. not only for political reasons, but numerically it is difficult to do the spending cuts alone. you need to cut the budget by 30% over the long term, and that will not be supported by the people in the long haul. we cannot just worry about the details of the revenue without considering what we need to pair it with on the spending side to go back and solve those challenges. the last thing i will say is what you're talking about, and donald mentioned, growth is the best way to raise revenue, and my concern is we spend all this time coming up with a small deal that is not market confidence building, not credible, and we end up hurting growth either through that process. -- either through a bad process

or a bad result. it is essential that it solves these critical issues -- short, medium, and long term and give the markets the stability it needs. >> if you ask somebody if you can go to the irish times, which i assume is a public watering hole, this concern about taxes and revenues as part economic, you do not want to hurt the economy or the recovery. it is driven by fear, and no elected official likes to go back and talk to people about having raised their taxes. you can see that in things that though middle class is always accepted by both sides of the -- is always exempted by both sides of the aisle, which has

nothing to do with policy, just with a big group of constituents? >> where you want to tell them they are going to be ok. all this conversation, and i am not a tax policy expert, is very abstract. these are people sitting around, talking about these policy issues. if you stop somebody in the aisle of walmart and talk to them about taxes, there is nothing said here that is the least bit persuasive to them in the process. when i was mayor and raised property taxes twice as governor, raised taxes once, we had a conservative state, and the way i got it down was always -- got it done was always to tie it very specifically to something that they can make a judgment about. as mayor -- i want to build schools in these locations on this schedule, i want to build a new arena or something like that. do not give me any new taxes and i will keep running the business, but these are the

things i want to do. you can pass it that way. you can see it in the government with medicare and social security. no one is arguing we have to cut medicare and social security taxes because they see them tied to something very specific. it goes into a trust fund used for their benefit. in the process of this, if you could print this discussion much -- if you could bring this discussion much more fully home -- it is more than just fixing that, and that is a specific use of it, bringing it home to some actual uses of this fund, how are you going to make the social security trust funds solvent over a long period, making it work, you would find resistance to this stuff a great deal less. >> do you think the president has made that connection with the outreach he has done since the election or during the

election? >> no, it is still in a class warfare mode on both sides. bringing it home, thinking about what you are going to tell that person wherever you see them about this -- you can take the sting out of this thing by -- there are other people here who have political things that may have raised or not have raised taxes, but to me the secret was always give them something for what it is you are asking for and make any specific transaction, not just a monster in washington that wants some more of your money. >> one area that should work, and i agree, governor, that makes great sense, and one area which should work is in road improvements and highway improvements.

simpson-bowles just said raising the tax gasoline 13%. you have universal opposition to raising the gas tax, which makes no sense because most people should want to have the gas tax increase if they know it goes to create a better road. if they understood that the highway fund is running a deficit, and having to borrow from china to fix the roads, it is something they would be concerned about. >> i accept the point that any tax increase has become problematical, but the gas tax i would add in along with medicare and social security, no one is fighting to decrease the gas tax. there's no protest outside of gas stations, because it is accepted at that kind of a level, whereas there's plenty of interest in cutting all kinds of other taxes.

as an elected official, i think these things which are tied specifically to benefits that people can see and can grab onto, are much easier to do, and that there is some opportunity in this debate to do that. >> can i make a quick point, based on research, which is are people willing to pay higher taxes to reduce the deficit? it turns out that overall people are with one are if they feel certain it will go to reduce the deficit. there is a little trust that revenues that go to washington will be used there instead of new spending or broken spending programs. the lessons we look from that -- only do you need to find ways to dedicate the revenue

projections and have enforcement mechanisms to make sure that any plan, all this proposal stay on track and are used for what they are intended to do, because there's not much trust if what you are linking it to is reducing the deficit -- >> i want to bring you back to this, because we are getting into the weeds on some of these things. ultimately, it will matter to folks in tennessee. 39.6%, the top rate. a return to that, what we saw during the clinton years. what will that do to the economy? >> it will hurt, but it is necessary. let me make a few points. first, i think tax reform is obviously better than raising tax rates. raising the top marginal tax rate is less desirable than try to scale back reductions in the tax code. i think there are some reasonable approaches to tax reform.

working for the day, going to -- i wish were king for the day, going through the code to decide what is good and what is bad. given that is not going to be the case, i think a proposal like maya's or even the president's is reasonable, and there is a lot of agreement for tax reform. $800 billion fromth the republicans. i think it is $600 billion from the president. i think there is room here for compromise. the second that i will say is that this tax reform will not generate enough revenue. $4 trillion. by my calculation, we do not need $4 trillion, but it is a bigger number than just tax reform will be able to generate, so in that context, we will have to let tax rates rise, and if we had to do that with an amount that would do the least economic damage, it would allow that topped rate to go back up.

it is not something you want to do, but given all of the choices, that is the least negative, so i think that is a reasonable thing to do in the context that we are not want to be able to generate enough -- that we are not going to be able generate enough revenue through tax reform, so let me give you the numbers i think will be good. roughly $1 trillion, $600 billion from tax reform, and house speaker john boehner has millions from tax reform. a logical number would be something like $1.40 trillion, $70 billion from reform, senator dollars billion from tax rates. $700 billion from tax rates. we talked about some spending items in the day. you can come up with some

numbers that will work, and here is the bottom line. i think our goal in terms of the market should be a deficit that is small enough at the end of the decade so that the debt to gdp ratio stabilizes. it would be great to get it down, but if we could get it stable by the end of the decade, we will not solve our problems forever, but we will solve the problems now, markets will be ok, businesses will be ok, and the fundamentals will improve, and we will be in much better shape. >> does anyone want to weigh in on the plan? $7 billion in reform. >> if you take their rates to 39.5% and then you cap deductions, what is your top effective rate? -- what is your effective rate on the top income people? another $700 billion on top. what is your actual effective rate? >> the rate of decay. -- the rate of the day?

42%, 43%. 43%. >> 40%. >> the top rate is going. this is thanks to the obamacare taxes. 39.6% and then more on top of that, you are in the 43% range. that is the reality. >> it the deductibility to get to the $700,000 -- but the tax policy center, the number is yes. you can get the money from the deduction. why we would want to push the rates higher and higher and higher. why we are going farther and farther away from the simpson- bowles is just beyond me. also about the money involved here, simpson-bowles, that was a placeholder to give us some more reform. since then, we have that $1.20 trillion deficits, $1.30 trillion deficits, and it simply is not enough. let's do some realistic

mathematics, which everyone is ignoring. if we do some honest macros scoring, if you have a goal of stabilizing, it is not enough, because we get the demographic bust happening to us in 2020. we actually have to have our debt coming down if we have any chance of surviving the entitlements, so that is not enough. you really have to get a number like $6 trillion or $7 trillion, ok? let's give the president his fantasy about what he can get from the rich. we have got $1.20 trillion to go. i am sorry. not fighting the wars in iraq and afghanistan is not savings, any more than my not by a maserati next year is a savings. where are we going to get the money? we will need that in the future. say we get another $1.80

trillion in discretionary cuts. where are you going to get the other $3 trillion? there is only one other thing out here, and we do not want to admit it, and that leads ultimately you have to get money from others than the rich, and that is why i was interested in maya's comments. did they say, "i am willing to pay more taxes," where did they say, "i am willing for the rich to pay more taxes"? we could draw a line in the sand at $250,000. that is not a very sensible plan if you are really going to deal with the deficit problem, which you do not have to do in december. lots of people's taxes are going to have to go up, in addition to the rich. >> the u.s. economy.

-- >> what is the way to do that and not hurt the u.s. economy? >> we need really, really fundamental tax reform. we also need entitlement reform, and we also need to use cost-benefit analysis. what shocked me about what the president put out is the cost- benefit analysis that they put out. they were proposing things that were twice the costs of their own benefits. i am sorry. if you run a government like that, you will go bankrupt. the rest of it is an exercise. we may as well go off the cliff or not. it really does not matter. if it is not january 1, it is not going to be too long from now before we start taking a sharp pencil to things. >> i sympathize with what larry is saying. what i am proposing, and what we are actually debating here is not to solve all of our problems ad infinitum into the future.

there should be to solve this over the next decade so we get to a stable place. that is very doable in the context of the debate we are having now. if we get $3 trillion and debate the arithmetic, i think that is using reasonable assumptions about economic performance, at the economic growth, and we get there. then, we see where we are. we see how the economy is performing three or four years down the road. this can change the budget projections vary significantly. >> what was it? -- when was the last time we hit the cbo projectin on growth?

>> actually, if you go back, and he can attest to this, sometimes it is too high, sometimes it is too low. >> the president's budget, 4% growth -- >> that does not mean they are going to be wrong in the same way going forward, right, larry? >> i want to come back to this question about what we have to get decided and when, because there are a whole lot of separate conversations going on that, and i think i followed that before. i did not follow it before. basically, the short-term and medium-term and long-term. short-term is the next two to five years. the imperative is that they do something now to help the economy in the short term to accelerate the economy, to get going. the cost of doing that, given the long-term problem, the cost of doing more now is the need to come up with the medium term

deal. so we need some sort of placeholder on the 10 years, and i do not mean placeholder. i mean some sort of deal. it is not the grand bargain, but whether it is $2 trillion or $3 trillion, we need to show that we can help the economy now, polaroid recovery, and have a -- accelerate the recovery, and have a situation over the next 10 years that is reasonable, stable, and not out of control. it would be nice that we could solve the problems 75 years ahead, but we never solve problems 75 years ahead. imposing that constraint on helping the economy now and -- the medium-term deal seems very unwise to me, and we should focus on what we can do. it is in port. -- it is important.

focusing on what we can do, which is doing something now, have a stabilizing deal and work on the issues as we figure out what works in health care and what does not work, how much we want to reform social security, what the economy is doing in 10 years, etc.. >> i have two issues with sort of ignoring the long term, and one is that most of the incredible reform to entitlements have a 10-year waiting period, so say we do not want to deal with them in 11 years. certainly by the end of the year. if we do not start on these things, like things like the fiscal cliff, when are we going to do it? i agree we need to delay the implementation of some of these, so that seniors can prepare, but i think we need to keep that in mind. secondly, in terms of the 10-

year in terms of the longer term, it is not that difficult to stabilize in the 10-year window. president obama's does. if we have done nothing on the entitlements, and that is worse than doing $4 trillion and having some systemic reform kicking in over the next few decades, so i think it is important. when we say stabilizing the debt, we need stabilizing it, not just for a few years and then having demographics again, ideally putting it on a path towards -- >> if you look at the president's plan, it does not meet my standard. he has not gone far enough. i agree. he has fallen short on spending. he has got it on revenue or pretty close. he has got three more to get the trajectories stable moving south as we go into the second tenures.

-- tenures of the long term horizon. >> all or ones, i can think it is just way too much for any realistic expectation, and, absolutely, they should adjust these issues. they should experiment. i would hate to have the economy right now, the economy over the next 5 to 10 years, held hostage because they cannot agree on what help reforms are going to -- on what health reforms they are going to happen 20 years from now. >> i want to get the senator involved. go ahead. >> well, there is one other time. 1991. the market fell. a 40% drop in one day, and within one week, it was four or five days to come to it.

it was the market that drove it. in a one-day drop in the dow, i that congress would act. that is what drove us to andrews air force base years ago. >> do you want to weigh and? >> i see this as a three stage rocket. this is only a question of where that comes out and what room it leaves. a tax reform blueprint next year. i am hoping we will not again make a fetish of the tax rate and look at the burden with what is reasonable. the tax reform, it is going to

reach beyond the wealthy. we have to be realistic. we are not going to hold the middle class harmless forever in this process, i do not think. secondly, we are not talking much about corporate tax reform. this system is uncompetitive from a global standpoint. there is a diminishing amount of money to the treasury. it is riddled with loopholes that distort sound business decision making. this has got to be changed as an economic imperative. we have u.s. companies sitting on profits that we need to repatriate and get back into the u.s., and the third stage, the longer run, we do need to look towards more revenue sources. we cannot look at this with the aging society based on just

looking at the income tax and payroll tax systems, which is why the carbon tax really does commend itself to me. tax that which you want less of. carbon emissions. carbon tax will raise $150 million a year. that is real money that we need not only to broaden the revenue base for an aging society, but it will also help lubricate the tough tax tradeoffs and horsetrading we will have next year. >> on the corporate tax rate, we have not talked about it that much. what does this mean in your business? >> it is not just the rate itself. that we are going to do something comprehensive and

real. again, you are competing with the u.k. parliament. they put their tax at 20%. there is no tax on repatriation. japan used to be the highest tax rate in the world, and we were second, and now, we are first. it is imperative from a competitive point of view. it is the absence of any decision that has got that trillions sitting on the sidelines waiting for some clarity about where we are going. long term fiscal responsibility. the handshake is there. the free market is in place. -- the framework is in place. we believe in these principles, and revenue is part of it. i would gladly give this up if i thought it was real long-term entitlement reform. >> just to be clear, you are talking about individual or corporate? >> from my perspective, i am part of that 2% that the people do not trust.

but it is all about are we going to do the hard things? i would give it up in a minute. i would even give up the 42% if i knew it was going to the right thing. and it was long term comprehensive reform. i am just telling you. i would in a moment. and i do not think i am alone. i know the hearts of a lot of people. there is frustration in the business community, and sometimes there are some things about the reality of the washington world, and i think we have to be respectful that these are difficult decisions. i would think we should frame it in terms of cost. what allows the american economy to be the engine of growth for the world? what would trigger fundamental changes? it would be a deeper, more fundamental approach. i would welcome it. lower rates and get rid of all

of the exemptions and make it clear in compete with other markets. u.s. companies are not just u.s. companies. they are global companies. and i think that is the reality. >> let me ask you a fundamental question. you talk above the other corporate issues, which are right. oec statistics which are good statistics, every other investor spends more -- every other nation spends more totally and taxes more totally, but they are higher than we are, and 28 points, they were all quite low. they were lower than 50 years ago. they have all gone up. i wonder if it is not due to what you said. peggy had a call the other day. would we all be satisfied if we

solve the fiscal problem, and basically what we were doing was taking 50% of the gdp and spending it? we had stability, and at least we are paying for it, and we do not care that we are taking half of all of the money in the country. >> senator, i would say it is all about the quality of what we are getting. you spend all of this money on health care, but what do you get for it? we do not get it in the ratings. life expectancy. >> is the continued left movement inevitable? we have to find a way to live with it and raise money for it and give up? >> i am not sure. >> every time we talk about the corporate tax code and overhauling it, be it revenue neutral, what with the corporate community say it? -- what would the corporate community say? >> $1.10 trillion in exemptions.

they used it to reduce rates. >> i am there. i am not worried about it. the corporate world is very much in the camp of doing what you've got to do as long as it is comprehensive and long term, and i think that framework is great. -- and i think the simpson- bowles framework is great. we all know the political realities, but it is the absence. committed to do the right thing long term.

that is causing all the money to sit on the sidelines. it starts with growth. you had a handshake. you built the framework. can i challenge the numbers? >> here are the figures, when you look at it. even spending, since 1980, government expenditures are pre much stable. >> but here are the figures. oecd started after world war ii. you could at least tell what the revenue was. we did know what the gdp was. best guesses are we were

spending 40% of gdp. no. and we are now, all governments, spending 42% of the gdp. and we want to make any effort to stop that? or are we discussing to say it has never stopped before? >> i think that earlier social security was not fully implemented. there was no medicare. it has been pretty stable since 1980. it goes up and down with the business cycle, but it is pretty stable. >> one thing that is clear that this is the division between the right and left, who will continue to fight about bigger government and smaller government. we will not do it by refusing to pay for the government we have, thinking the economy in the process. that would be a good start, as a backdrop. i want to touch on your question about corporate and individual taxes.

the third piece is small businesses. we work out how to develop a tax code that is good for competitiveness. you need to think about how those play into it. i think one of the things to keep hearing through messages with different groups of people is, while everybody is aware that the solution is going to take sacrifices from all sides, on spending, on revenues -- the confidence you get for putting the deal in place actually has tremendous economic benefits. the cheapest form of stimulus is confidence. if we can put that in place, and people believe something is going to stick, it becomes easier to do your part in all of this. if the moving pieces and revenue are there, do not underestimate the benefit of what the future holds. >> this ties into michael's point. the productivity, the amount of money they get spent maintaining and administering the complex tax code is unbelievable. i would rather be spending that money.

let us get on with building a business. society should do it. -- i know there is a side issue to it. people should take that as a given. i know the rest of us have it. we would gladly get rid of all of that in a minute. it is a health care issue. we talked about technology and data sharing. there are productivity, issues that are significant. >> i want to touch on some other hot-button topics we have not discussed as much. capital gains, dividends. current laws, they go back up. dividends treated as ordinary income. capital gains goes back up to 20%. how much revenue are we talking about? if those become bargaining chips, how much are we giving up? >> under current law, the capital gains rate is scheduled to go to 20%. we are actually talking 23.8%.

dividends are scheduled to go to ordinary rates. you need the 3.8% for people who have higher incomes. significant increases in both are scheduled. as you think about the fiscal cliff and what is coming, one of the few places you can see people responding to it is in their behavior around capital gains and dividends. companies are moving up to how, shareholders take a vintage of a lower rate. i expect you will see more investors realize lower capital gains in order to get lower rates. there is clearly money there. there is clearly money that has interesting, distributional characteristics. that tends to be money that comes from higher income folks. as you think about the political process trying to structure when a package with a revenue goal and a distribution goal, my prediction is you will see at least some of those increases occur. i personally would be surprised

if the dividend rate went back up to ordinary rates. the senate would allow it to stay at the capital gains rate, and go it to 15% to 20%. the president initially proposed cutting dividends they the same as capital gains. -- proposed letting dividends stay the same as capital gains. my guess would be that that is where we end up. >> what would you say is best? should the dividend be the same as capital gains? >> i find it hard. i have looked around. i find it hard to have an argument for why the dividend rate of to be higher than the capital gains rate. i am sympathetic to the argument that some corporate leaders have, engage in empire building and look for excuses to keep pete pashtun. there are benefits to having some of it paid out in regular dividends. i am sympathetic. there is a laffer curve effect which is at some point -- if you start talking about raising capital gains rates to ordinary

income rates, the model we use suggests you may actually go too far and start losing revenue, because capital gains are, in some sense, a discretionary, a voluntary thing to realize. i do not think there should practically be a discussion about going that high. it is hard to go to war over the difference between 18.8% and 23.8%. anybody want to go to war over that? >> what is your own thought, if it returns to ordinary rates? what happens? >> when it was first cut, which was in 2003, we were running into a problem, because the stock market was down perianth america's pension funds were in trouble. -- the stock market was down and america's pension funds were in

trouble. we did a back of the envelope calculation which turned out to be too cautious. the dividend was worth 8%. 1100 dow points, something like that. i think that is probably right. i forgot a name. >> it is out there. it is about twice that. i do think that recent capital -- that raising capital gains rates will not have found effect will not anticipated. there is money there. >> we have not talked about the estate tax. a lot of politics in the u.s. senate over the estate tax. could this deal blow up over the estate tax? >> maryland has been known to do -- mary landers has been known to do very aggressive things on the floor of the senate. i think you end up with an estate tax of whatever number barry wants it to be at.

-- whatever number mary wants it to be. >> really? we have about a minute or so left. anyone else want to weigh in? you have a unique opportunity. the president, john boehner, could be getting set to talk again later this week. what advice would you give them on taxes? >> these are very minor issues, in terms of total revenue derived. but they are very significant to members. if you were to tell the bulk of the democratic caucus in the house that we were going to do something draconian to the inheritance tax, that could cost you a lot of votes. this is a carefully crafted a balanced package the house to emerge. -- that has to emerge. all these issues need to be tested. a little focus group on the conference side. these can be symbolically important. they can blow the opportunity to do something broadbased and fundamental. do we end up with something close to balsams and because of

-- to bowles-simpson just because of that point? >> we would be better off if speaker boehner and the president did not publicly change their offers. hopefully, they are going to have to compromise. the more times you commit yourself in public, the harder it is to make the compromise. >> we will go around the former members of congress. do they cut a deal to avoid the fiscal cliff before we actually get there? >> i believe so. >> senator? >> yes. the treasury secretary says withholding taxes and does not have to raise them even if the taxes go up. why sequester does not have to be month by month. you can do the sequester in the last 12 months. he gives the congress four or five months into the next year before the house to reach a deal. -- before they have to reach a deal. >> they could kick the can down

the road. who thinks the market will not let them do that? there will be punished. sooner rather than later, you think? we have not seen it so far. >> i am in the camp of, the herd will turn. erskine bowles has a famous line. we got away with this last time because we were the best- looking horse in the glue factory. we are not going to get a pass this time. there is no question. who will get punished. and that is very dangerous for everyone, all of us. >> it is great for me to remind you -- you can watch the president on bloomberg television shortly. thank you all for a lively discussion. some interesting points made and some food for thought for the folks making these decisions. >> a quick thank-you to the panelists. what has struck me is how much of this is probably by designs, but how much of our discussion was not on the fiscal cliff per se but how much it is important

avoiding the fiscal cliff and it -- and using it to sell these fiscal issues. i am delighted by the quality of this mission from our analysts and thank you for joining us today. [applause] >> several live events to tell you about the date on our companion network c-span 3. bob woodward and florida senator marco rubio a little after 8:00 p.m. eastern. at 10:00, the senate appropriations committee off the federal response to hurricane sandy. and the house foreign affairs committee looks in two regional influence. that is said to p.m. eastern. >> coming up next, "washington journal